Investors are poised to swoop on China's first batch of public real estate investment trusts (Reits) when the nine infrastructure-focused trusts - which cover industrial parks and warehouses to sewage plants - become publicly traded next Monday (June 21).
With infrastructure-underlying Reits the only Reit structure currently permitted in China to all investors, the expected addition of property assets - which could be worth an estimated $3 trillion - is set to supercharge China's nascent Reit market.
Experts believe this newly added investment choice will generate strong demand among both institutional and retail investors, given the attractive yield and the diversification of assets. Nevertheless, a fully-developed market could take time to emerge given that capital markets in mainland China tend to be tightly regulated.
The first batch, with five to be listed on the Shanghai bourse and the rest in Shenzhen, has already raised a total of Rmb34 billion ($5.3 billion) from a wide range of investors.
From industrial parks, toll roads, logistics and urban utilities to environmental protection facilities, the highest dividend among the first batch could reach as high as 12%, the lowest would also secure around 4%, according to Bloomberg estimated data.
This would put their yields just ahead of the country’s government bonds. As of June 9, the yield on China's five-year and 10-year government bonds stood at 2.95% and 3.12% respectively.
Higher yield, relatively low risk and long-term secured assets are catcing investors' eyes, especially large insurance companies which are always chasing fixed returns.
Timothy Chan, chief investment officer of Ping An Insurance (Group), told AsianInvestor that the infrastructure Reits are in line with the firm’s long-term investment strategy and the group had invested in Shenzhen-listed Guangzhou Guanghe Reits under strategic placement, a product underlying toll road assets in Guangdong province.
“Infrastructure Reits are widely recognised by the international market for their higher liquidity and stable return features,” he added.
Scaling up infrastructure Reits won't be easy, given that cash-producing assets operating on market principles are still scarce in China.
China’s capital market is a policy-driven market and the Reits market is likely to develop gradually, Andrew Chan, managing director at Cushman & Wakefield, told AsianInvestor.
"In future, we will see expansion in infra Reits first before the regulator widens the product to real estate Reits," he said, adding that a healthy market came ahead of any rush to expand.
Chan noted that, logistics, business parks and data centres assets are expected to receive more launch opportunities in the future, but the real estate Reits still takes time before the market is ready.
"Institutional investors are still dominating the Reits market in China while retail investors have shown huge interest in the first batch. Given the volatility of the equity market, retail investors are attracted by the first batch for their secured yield and lower volatility," he said,
He added that investment education was still needed and that was one of the reasons that Reits products of specific types would only gradually be extended to the public.
Compared to Reits in other jurisdictions, China’s infra Reits have tighter regulations, in part to avoid potential systemic risks to the capital market. These include tighter leverage ratio requirements, criteria of sector and geographic location of the underlying assets, another Moody's report noted.
Even so, the market is still expecting that after this batch, there will be more to come.
A Goldman Sachs report estimates that the country is expected to have a $3 trillion property Reits market going forward and comes against the backdrop of Beijing attempting to cool down a debt-fueled property market by providing more financing tools to offload developers’ debt burden.
In May last year, Chinese financial regulators announced a long-awaited pilot programme for Reits which would allow China’s mutual funds to issue public Reits that could be bought and sold like equities on exchanges. In August, the regulator followed with another detailed guideline for the scheme.
Almost within a year, the scheme became a reality with the first batch testing the water.
GLP, a global logistics real estate investor, is among the first batch of issuers. A spokeswoman from GLP told AsianInvestor that, as of June 3, the initial public offering of the product GLP C-Reit was 72% subscribed by cornerstone investors made up of mostly Chinese financial and insurance institutions.
GLP has taken a 20% stake in the C-Reit while other cornerstone investors including Taikang Life taking 20%, Shoucheng Holdings (10%), Dajia Investment (8.39%), CICC Wealth Management (8.33%), CCB Trust (3.5%) and China Insurance Investment Fund (1.78%).
According to the latest report from Cushman & Wakefield, some 90 Reits-like products were issued in 2020 in the country, totaling Rmb180 billion, up 8.4% and 13.1% respectively over the previous year in terms of number and value.